CO-EXTENSIVENESS VIS-À-VIS UNCERTAINTY OF THE DEBT DUES

In terms of Sec.128 of the Indian Contract Act, 1872, the liability of the surety is co-extensive with that of the Principal Debtor, unless it is otherwise provided in the contract. The term “coextensive” has been defined in the book of Polock & Mulla on Indian Contract and Specific Relief Act, Tenth Edition, at page 728 as under:

“Co – extensive. Surety’s liability is coextensive with that of the principal debtor. A surety’s liability to pay the debt is not removed by reason of the creditor’s omission to sue the principal debtor. The creditor is not bound to exhaust his remedy against the principal before suing the surety, and a suit may be maintained against the surely though the principal has not been sued.”

A surety’s liability to pay the debt is not removed by reason of creditor’s omission to sue the principal debtor. The creditor is not bound to exhaust his remedy against the principal debtor before suing the surety, and a suit may be maintained against the surety though the principal debtor has not been sued. But where the liability arises only upon the happening of a contingency, the surety is not liable until that contingency has taken place. The liability of the guarantor to pay the amount under the guarantee is not automatically suspended when the liability of the principal debtor is suspended under some statutory provision. Thus a contract of guarantee being an independent contract is not affected by liquidation proceedings against the principal debtor.

The principle of co-extensiveness was examined by the Hon’ble Supreme Court of India in the case of Bank of Bihar Ltd. v. Damodar Prasad & Another2 and observed that in the absence of some special equity, the surety has no right to restrain an action against him by the creditor on the ground that the principal is solvent or that the creditor may have relief against the principal in some other proceedings. Having said that, coming back to the judgment of Hon’ble High Court of Allahabad in Sanjeev Shriya’s case supra, the reason for staying the proceedings against the guarantor in DRT was that the liability has not been crystallized either against the principal debtor or guarantors/mortgagors. The court had also made an observation that once the liability is still in fluid situation and the same has not been crystallized, then in such situation two parallel/split proceedings in different jurisdiction should be avoided.

It would be interesting to note that as per Sec.60 (3) of IBC, an insolvency resolution process or bankruptcy proceeding of a personal guarantor of the corporate debtor pending in any court or tribunal shall stand transferred to the Adjudicating Authority dealing with insolvency resolution process or liquidation proceeding of such corporate debtor. It can be presumed from the said provision that until the Corporate Debtor is ordered of liquidation, the money due to the creditors cannot be said to be crystallised and the guarantor also steps into the same status. That is the reason precisely the High Court of Allahabad has stayed the proceedings against the guarantor. Secondly, the Guarantor is also barred from filing any claim, suit, action against the Corporate Debtor during the moratorium period which was declared for the same reason the guarantor has paid.

It may be relevant to refer to Sec.22 of the repealed Sick Industrial Companies (Special Provisions) Act, 1985 (“SICA Act”) which is similar to that of Sec.14 of IBC. The provision which was amended3 during 1994 had expressly provided for the suspension of legal proceedings against the guarantor also during the moratorium. As per the said provision, where in respect of an industrial company, an inquiry is pending, or any scheme is under preparation or consideration, or a sanctioned scheme is under implementation or where an appeal relating to an industrial company is pending no suit for the recovery of money or for the enforcement of any security against the industrial company or of any guarantee in respect of any loans or advance granted to the industrial company shall lie or be proceeded with further, except with the consent of the Board or, as the case may be, the Appellate Authority.

One of the objective behind the declaration of ‘Moratorium’ under IBC is to treat the business enterprise as ‘Going Concern’ thereby exploring the possibilities to revive or rehabilitate the corporate debtor in distress. The objective is similar to that of the provisions of SICA Act. Therefore, there cannot be a different intention under IBC to allow the creditors to continue the legal and recovery proceedings against the assets guarantor where the proceedings are stayed against assets of corporate debtor. But, the ambiguities in the provisions make it impossible to come to a conclusion in interpreting the provision relating to moratorium. The language employed in Sec.14 (1) (c) gives the impression that the moratorium is applicable only to the assets of corporate debtor. Further, coming to the limitation aspect, Sec.60 (6) restricts the exclusion of computation of limitation during moratorium only to corporate debtor without making any reference to guarantors. In the absence of notifying the provisions of IBC relating to individuals, the creditors cannot take chance losing the legal remedies and therefore left with no option than to file the applications against the individual guarantors before DRTs. In case of approval of Resolution Plan submitted by the Corporate Debtor, such approval of modified terms of repayment without the concurrence of Guarantors may lead to challenging any future action against the guarantor on the basis of novation of contract by the creditors with corporate debtor.